December 1, 1992
TO: BOARD OF GOVERNORS NO. 86-92
RE: ARTICLE ON CHANGES IN FINANCIAL INTERMEDIATION
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At the October Board meeting, I reported that due to the
growth of mutual funds and problems in the banking industry,
there is an increasing likelihood that suggestions will be made
to impose bank-type regulation on mutual funds.
Attached is an article by Gordon H. Sellon, Jr., an
assistant vice president and economist at the Federal Reserve
Bank of Kansas City, which appeared in the Bank’s Third Quarter
Economic Review, entitled "Changes in Financial Intermediation:
The Role of Pension and Mutual Funds." The article states that
"banks and thrifts have been adversely affected by the growth of
pension and mutual funds", and that "by altering the roles of
traditional intermediaries, pension and mutual funds
have....contributed to the increased instability of financial
markets in recent years. These changes in the intermediation
process raise important questions about the future regulation of
financial intermediaries."
The article concludes by stating that:
A closely related issue is whether regulation should be
harmonized across competing intermediaries. Differential
regulation was possible in the early postwar financial
system because of the specialization of intermediaries and
absence of direct competition. In the current environment
where specialization has broken down and intermediaries
desire to perform a broad range of financial services,
differential regulation may no longer work. In the current
system, it may not be possible to regulate one intermediary
that offers many of the same services as an unregulated
intermediary. Continuing differential regulation may put
some intermediaries at a competitive disadvantage,
increasing the likelihood of failure and decreasing the
stability of the financial system.
* * *
We will keep you informed of developments.
Matthew P. Fink
President
Attachment